5. The regressivity argument

The tobacco industry, and also some independent observers, periodically make the claim that tobacco taxes are highly regressive, i.e. that they fall more heavily on the poor than the better-off. In most countries, poor people are more likely than rich people to use tobacco, and spending on tobacco accounts for a higher proportion of their income than it does for rich people. So, they argue, the tax burden on tobacco is borne primarily by the poor.

Responses:

Low-income smokers are demonstrably more price-sensitive to tobacco products than rich people, so they are substantially more likely to quit using tobacco products when taxes are increased. Those who quit entirely not only avoid paying the increased tax — they reduce their tax burden, and no longer enrich the tobacco industry. In the countries where the issue has been studied, the financial gains by those low-income smokers who quit at least balance out the financial losses among poor people who continue to use tobacco. In this sense, tobacco tax increases are actually progressive in their effect.

Jha et al have examined the impact of tobacco taxes in various countries and have found that those of lower socio-economic status (SES) pay a smaller proportion of tobacco tax increases than higher-SES smokers, and that they receive more of the health benefit of the increase than higher-SES smokers.

Local Elasticities: Distribution of marginal taxes and health benefits by SES group. Source: Jha P. Death and Taxes. Presentation. Available on-line.

If the concern is to reduce inequality in society, it is important to look also at health inequalities. Tobacco use accounts for a significant portion of the life expectancy gap between rich and poor in many countries.36 Tobacco tax increases are the best way of reducing the prevalence gap between rich and poor (by reducing prevalence in both groups, but more amongst the poor). Hence, tobacco tax increases strongly favour equality.

The money paid by individuals in tobacco tax does not simply disappear — it becomes available for governments to use for public purposes. One legitimate public purpose is to use it for poverty reduction, via transfer payments to low-income families, off-setting tax reductions on basic foodstuffs, investments in public education, smoking cessation support for the poor, etc.37

If we push to its logical conclusion the idea of keeping tobacco taxes low out of concern for the financial welfare of the poor, we should recommend that governments provide free tobacco products to the poor. This is nonsense: No sane person would agree that the poor are helped by having cheaper access to products that kill them.